HEALTH SAVINGS ACCOUNTS (HSAs)

INTRODUCTION This manual on Health Savings Accounts ( HSAs ) is offered by JM Consultants. The material covered is believed to be accurate but due to the nature of changes in the laws governing HSAs and the release of information by the Internal Revenue Service (IRS), JM Consultants cannot guarantee the accuracy of this material. This material reflects the rules regarding HSAs as of September 1, 2016. If you have any questions about the manual or as to the timeliness or accuracy of the material please be sure to contact JM Consultants. Some of the information presented is not covered entirely but, rather, is covered only partially for illustrative purposes. This material only reflects the rules of the Federal government regarding HSAs and does not reflect any part of any particular state rules or regulations. No part of this manual or presentation may be reproduced in any form by any means without the written permission of JM Consultants. Published by JM Consultants 6930 Glory Road Baxter, MN 56425 218-831-1858 jmcmnelson.com Please Note: JM Consultants does NOT provide legal, accounting, investment or tax advice. In important matters like this you must rely on your own legal, accounting, investment or tax professional before making decisions. 3

Table of Contents Page Introduction 3 Background of Health Savings Accounts 7 529A ABLE Accounts (Achieving a Better Life Experience) 8 Who is Eligible to Establish a Health Savings Account? 9 High Deductible Health Plan (HDHP) Defined 9 Self-Only HDHP 9 Family HDHP 10 HSA Eligible Individual 11 HDHPs A Closer Look 11 HSA vs. HDHP 13 More HDHP Details 16 HDHP Questions and Answers 17 How to Establish a Health Savings Account 21 A Sample HSA application 23 HSAs as Individual Accounts 24 HSAs and Customer Identification Program (CIP) 24 A Sample HSA Eligibility Form 25 A Sample HSA Beneficiary Designation Form 26 HSAs and Community/Marital Property States 27 IRS Ruling and Clarification on Same-Sex Marriages 27 Amending HSAs 29 JM Consultants Recommendation 30 Contributions into a Health Savings Account 32 Catch-up Contributions 32 HSA Annual Contribution Limits 33 Documenting HSA Contributions 33 Tax Benefits of Contributions 33 HSA Eligibility and Medicare 34 4

Table of Contents continued Page Reduced or Increased Contribution Limits 35 Special HSA Rule for Married Persons 38 Contribution in the Year of HSA Owner s Death 39 Qualified HSA Funding Distribution IRA 39 Split HDHP Coverage 42 HSA Custodian/Trustee Responsibilities 42 HSA Contribution Deadlines 43 Excess HSA Contributions 44 Excess HSA Contribution Net Income Attributable (NIA) Worksheet 47 Excess EMPLOYER HSA Contributions 50 HSA Rollovers and Transfers 52 HRA and Medical FSA Qualified Funding Distribution 56 Withdrawals from Health Savings Accounts 58 HSA Custodian/Trustee Limitations 60 IMPORTANT CHANGES for 2011 2016 61 HSA Beneficiary Options 62 Regulation E and HSAs 63 FDIC/ NCUA Coverage 64 HSA Investments 66 HSA Overdrafts and NSF Checks/Drafts 68 HSA Prohibited Transaction IRS Penalties 70 HSA Custodian/Trustee Fees 70 Reporting Requirements for HSAs 72 Reporting HSA Contributions 73 Reporting HSA Withdrawals 77 HSA Distribution IN the Year of Death 80 5

Table of Contents continued Page HSA Distribution in a Year AFTER the Year of Death 80 Mistaken Distributions 81 HSAs and Fiduciary Responsibility 84 HSA QUESTIONS and ANSWERS 87 APPENDIX A Form 8889 93 APPENDIX B HSA Resources 96 6

Background of Health Savings Accounts Health Savings Accounts (HSAs) were created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and became available to the public in 2004. It is a tax advantaged financial account, similar to an IRA, established by an individual to help pay for qualified medical expenses. One of the key features of the HSA is for HSA Owners to use pre-tax HSA dollars to pay for their medical expenses as well as the medical expenses of his or her spouse and dependents. Prior to HSAs being created, in 1996, Congress had created its predecessor known as Medical Savings Accounts (MSAs). These MSAs were subsequently renamed Archer MSAs honoring Texas Congressman Bill Archer who was instrumental in passing the legislation. The MSA program was originally intended to be a pilot program that would run from 1997 through 2000. After gathering and reviewing data from the MSA/Archer MSA program, Congress decided to make the program permanent but with significant improvements. It was due, in part, to this Congressional analysis that the HSA legislation was written. Archer MSAs are still operational today. Archer MSAs are also discussed in this manual. With the tax-benefits associated with HSAs (discussed later), HSAs have proven to be a very popular program and knowing the rules about HSAs can help your financial organization have a successful HSA program for your own employees and for your customers and their employees. The Affordable Care Act (ACA) sometimes referred to as Obamacare, can indirectly affect HSAs. Full implementation of the law, with certain exceptions, was started in 2014. Certain ACA limits may affect existing medical plans. Individuals must rely on their insurance provider to make sure they are eligible to make HSA contributions. HSA Custodians/Trustees are NOT responsible for this determination. While some ACA limits and requirements may be different than those for HSAs, the ACA does NOT change the HSA limits and requirements discussed in this manual. For instance, the ACA 2016 out-of-pocket limits for HDHPs is $6,850 for Individual Policies and $13,700 for Family Policies. The HSA limits for 2016 are $6,550 and $13,100 respectively. REMEMBER: It is the HSA Owner s responsibility to determine HSA Eligibility, NOT THE RESPONSIBILITY OF THE HSA CUSTODIAN/TRUSTEE! 7

529A ABLE ACCOUNTS (Achieving a Better Life Experience) ABEL Accounts are NOT discussed in this HSA Manual. IRC 529A ABLE accounts were created by the Tax Increase Prevention of 2014 and are designed to accumulate financial resources to assist individuals with special needs. Contributions are NOT deductible, have tax free growth and have special distribution purposes. Distributions for qualified medical expenses are tax-free. ABLE Accounts can be established through an individual s state, state agency or instrumentality. They are NOT established like IRAs, HSAs or CESAs. However, rules and procedures are similar to those for Coverdell Education Savings Accounts (CESAs). Annual contributions can be as much as $14,000 for an individual who was blind or disabled by age 26. A rollover for an ABLE Account is an amount from another ABLE account for the same individual, OR from an ABLE Account of a family member of the individual. Like IRAs, there can be only one such rollover per year per person. The 60-Day rollover rule also applies to these accounts. However, remember, ABLE Accounts ARE NOT IRAs, HSAs or CESAs! 8

Who is Eligible to Establish a Health Savings Account? While many individuals are eligible to establish an HSA, not everyone is. Nothing in the ACA has changed these requirements. However, as noted earlier, some ACA requirements may affect HSAs in the future. In order to be eligible to establish an HSA an individual must meet all of the following four requirements: Requirement #1 The individual must be covered by an HSA-Eligible high deductible health plan (HDHP), and Requirement #2 The individual must not be covered by another health plan that is not an HDHP (Limited exceptions will be covered later in this material), and Requirement #3 The individual cannot be enrolled in Medicare, and Requirement #4 The individual cannot be claimed or be eligible to be claimed as a dependent on another individual s personal Federal Income Tax Return. For instance, an HSA Owner could be claimed on her son s personal tax return. However, the son does NOT claim his mother on his tax return. Even though she was NOT claimed by her son, she is NOT HSA-Eligible. High Deductible Health Plan (HDHP) Defined An HSA-eligible HDHP is a health plan that meets certain requirements. These health plan requirements include having a deductible amount that cannot be less than certain minimum limits and having out-of-pocket expenses that cannot be more than certain maximum limits. There are two types of HSA-eligible HDHPs: Self-Only Coverage and Family Coverage. Self-Only HDHP The term Self-Only Coverage means exactly what the name implies; it covers just one person. Sometimes this term is used incorrectly as in Single Coverage which, to some, may imply that the covered individual is not married. Having Self-Only Coverage in no 9

way denotes marital status. In fact, in some cases it will be to the advantage of a married person to have Self-Only Coverage because his or her spouse has separate health care coverage elsewhere. Likewise a single parent may want family coverage to include his or her dependents. Family HDHP The term Family Coverage means coverage of more than one person. It does not require that all family members are covered by the Family Coverage or that individuals must be married. The covered individuals do not even have to be related. As long as two people are covered by the same HDHP, the policy is considered a Family HDHP. Since marriage has nothing to do with an HDHP s HSA-Eligibility, the recent US Supreme Court ruling on same-sex marriages has NO AFFECT on HSAs or HDHPs. It depends on health insurance coverage, NOT marriage. IMPORTANT NOTE: Determining the eligibility of the individual or whether or not a medical plan is an HSA-Eligible HDHP is the full responsibility of the HSA Owner. The HSA Custodian or Trustee has no responsibility in this determination. This, of course, then makes getting proper, verifying documentation from the HSA Owner an important part of HSA administration for the HSA Custodian/Trustee. The HSA Custodian/Trustee wants to be sure the HSA Owner is eligible because no one enjoys correcting excess contributions. The following chart illustrates the requirements that a health plan must meet to be considered an HSA-eligible HDHP: Year Type of Coverage Minimum Deductible* Maximum of Out-of-Pocket Expense* 2014 Self-Only $1,250 $6,350 Family $2,500 $12,700 2015 Self Only $1,300 $6,450 Family $2,600 $12,900 2016 Self Only $1,300 $6,550 Family $2,600 $13,100 2017 Self Only $1,300 $6,550 Family $2,600 $13,100 *These numbers are subject to annual Cost-Of-Living Adjustments (COLAs) It should be noted that in order for an HDHP to remain an HSA-Eligible HDHP the minimum deductible amounts as well as the maximum out-of-pocket limits of the HDHP 10

may need to be adjusted periodically, even annually, to meet these changing statutory limits. If they are not updated as needed the plan will no longer be an HSA-Eligible HDHP. It could still be what the insurance industry considers to be an HDHP; it just would NOT be an HSA-eligible HDHP. NOTE: The insurance industry has many types of HDHPs. All HDHPs are NOT HSA- Eligible. This is especially true now after the enactment of the ACA. It is a good idea for the HSA Owner to get written confirmation from his or her insurance provider that the policy is HSA-Eligible. Again, it is NOT the responsibility of the HSA Custodian or Trustee to determine eligibility. The HSA Custodian/Trustee requesting written proof from the HSA Owner, though, is a good idea and one JM Consultants highly recommends. Some forms vendors have eligibility forms requesting the HSA Owner to re-verify their HSA eligibility with the insurance provider, documenting the HSA Custodian/Trustee due diligence. HSA-Eligible Individual To be an HSA-eligible individual one must be covered by an HSA-eligible HDHP. The individual must be covered by the HDHP on the first day of the month for which a contribution is made (an exception for the monthly HDHP coverage rule will be covered later). Note that there is no compensation or earned income requirement for HSAs like those that exist for IRAs. Caution: When applying for Medicare, HSA Owners must be sure to ask the Social Security Office about HSAs. There are certain situations that cause a six month retroactive activation of Medicare which could disqualify an individual from making HSA contributions and causing an excess contribution situation for contributions already made. HDHPs A Closer Look When determining whether or not a health plan is an HDHP it is important to remember that both requirements must be met; that is, the plan must not pay out any benefits until the minimum deductible limit is met, and the plan cannot require that out-of-pocket expenses exceed the maximum limits. Some health plans have embedded deductibles. This means that the plan can have a deductible limit that applies to each person covered by the plan in addition to an overall or umbrella deductible limit addressing an aggregate deductible. However, to remain 11

HSA-eligible, no benefits can be paid out of the HSA to anyone covered by the HDHP until the total statutory minimum deductible is covered. Deductible Example 1 A family coverage health plan, Plan A, has a 2015 $2,000 deductible limit for each of the five family members. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,000 deductible limit. Plan A has a $10,000 out-of-pocket limit. This plan would not be considered an HSA-eligible HDHP since it will pay out benefits before the 2015 minimum $2,600 deductible limit for family coverage is met. This is true even though the 2015 out-of-pocket limit of $12,900 for the five members is not exceeded. Deductible Example 2 A 2015 family coverage health plan, Plan B, has a $2,600 deductible limit for each of the five family members. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan B has a $12,500 out-of-pocket limit. This plan would be considered an HSA-eligible HDHP since it will not pay out benefits before the 2015 minimum deductible limit of $2,600 for family coverage is met and the out-of-pocket limit of $12,900 is not exceeded for 2015. However, the policy would need to clarify that the out-of-pocket limit includes the deductibles and will not exceed the statutory limit. Out-of-Pocket Example 1 A family coverage 2015 health plan, Plan C, has a $2,600 deductible limit for each family member. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan C has no expressed outof-pocket limit. This plan would be considered an HSA-eligible HDHP for any family with two to four covered individuals since, in those scenarios it will not exceed the maximum out-of-pocket limit ($2,600 x 4 = $10,400) and it will not pay out any benefits until the minimum deductible ($2,600) has been met. Plan C would not be considered an HSAeligible HDHP with five or more covered individuals since that would require the out-ofpocket limit to be exceeded ($2,600 x 5 = $13,000) even though the minimum deductible would be met. Out-of-Pocket Example 2 A family coverage 2015 health plan, Plan C, has a $2,600 deductible limit for each family member. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan C has no expressed outof-pocket limit. This plan would NOT be considered an HSA-eligible HDHP because the maximum out-of-pocket expense is not within the 2015 statutory limits, even though the annual deductible limit is met. 12

Out-of-Pocket Example 3 A family coverage 2015 health plan, Plan D, has a $2,600 deductible limit for each family member. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan D has an umbrella out-ofpocket limit of $12,900 and will pay 100 percent of covered benefits if the family satisfies the $12,900 umbrella deductible even if no single member satisfies the $2,600 deductible. This plan would be considered an HDHP for 2015 no matter how many family members are covered since the $12,900 out-of-pocket limit can never be exceeded and the plan would not pay out any benefits until the minimum deductible (in this case per person) has been met. Out-of-Pocket Example 4 A family coverage 2015 health plan, Plan D, has a $2,600 deductible limit for each family member. The plan pays 100% of covered benefits for each family member after that family member reaches the $2,600 deductible limit. Plan D has an umbrella out-ofpocket limit of $13,500 and will pay 100 percent of covered benefits if the family satisfies the $13,500 umbrella deductible even if no single member satisfies the $2,600 deductible. This plan would NOT be considered an HDHP no matter how many family members are covered since the $13,500 out-of-pocket limit exceeds the 2015 statutory limit even though the plan would not pay out any benefits until the 2015 minimum deductible (in this case per person) has been met. HSA vs. HDHP Many HSA Custodians and Trustees confuse the HSA with the HDHP. For example, it is common for an HSA Owner, HSA Custodian or HSA Trustee to think that an HSA is a Family HSA that has more than one owner because the HDHP has family coverage. Or, conversely, it is commonly thought that if an HSA Owner is covered by an HDHP that has self-only coverage that his or her HSA can only be used for his or her own qualified medical expenses. In both cases, this thinking is incorrect. While the HDHP may provide self-only coverage, the HSA funds can be used for the qualified medical expenses, incurred after the establishment of the HSA, for the HSA Owner, his or her spouse, and any of the HSA Owner s dependents as well. And even if the HSA Owner has a family HDHP, the HSA is still an individual account, NOT A JOINT ACCOUNT or CO-OWNED ACCOUNT. An HSA cannot be a joint account. The investments cannot be joint investments. The checking account, debit cards, stored value cards, etc., cannot be joint accounts. While the definition for qualified medical expenses remains the same, the HSA must be an individual account, 13

with individual investments. The additional signers names cannot even be on the account in any manner. PLEASE NOTE: None of the HSA accounts/investments can have multiple names or different names than the HSA Owner, which must be only one individual. It makes no difference what your policy is for other accounts. It is no different than the rules governing IRAs. IRA investments can NOT have multiple names on them either. You don t and can t add a Power of Attorney s name to the IRA investment. Let s look at it from another perspective. When a business has multiple signatures, you do not put all of their names on the business investments or checking accounts titles. The rule is the same for HSAs and must be followed. When an HSA Owner wants the HSA to have multiple signatures, for instance a spouse, the account must be set up individually with multiple signatures allowed. They cannot be set up as joint accounts! This also means the additional signer(s) CANNOT be named/listed on any part the checks, debit cards or any other HSA investment can NOT be issued in the name of the additional signer(s). The additional signer(s) are named on the financial institution files but the checks and/or debit cards are issued ONLY in the name of the HSA Owner. While this can cause problems at times, the HSA cannot appear to have multiple owners. This procedure must be followed. Possible Alternative: Since overdrafts seems to be causing so many problems, especially with debit cards, here is a suggestion, however IT HAS NO IRS BASIS! Maybe the HSA debit, HSA credit card or HSA checking account can just list the HSA Owner as the owner, but then also list the additional authorized signers, as such an authorized signature. Again BEFORE doing anything outside the discussion above, the HSA Custodian/Trustee should review it carefully with their compliance and legal counsel. Because, again, the IRS has NOT changed any of their policies or procedures concerning this. One final comment on this: It has been our experience at JM Consultants that when we hear the excuse/reason Our system won t let us do that, it usually means our system programmers don t want to allow it or don t want to make the necessary changes, NOT that it can t be done. It is also recommended that since an HSA is considered a legal trust, even if it is a custodial account, that the HSA Owner supplies the HSA Custodian/Trustee with a Power of Attorney (POA) allowing the additional, authorized signature(s). Just having a signature card signed is not sufficient. (Many forms vendors have POA forms designed just for this purpose.) If your forms vendor does not have such a form, the HSA 14

Custodian/Trustee should consult with their legal counsel and design a single purpose POA for the HSA. JM Consultants has seen a simple, single-purpose POA designed for this situation. The POA should be clear as to what authority is being given. A copy of the POA should be part of the permanent file for the HSA Owner. And, of course, it must comply with all state laws. IMPORTANT: It must also be remembered that the HSA and HDHP are two separate agreements. The HDHP is an insurance plan, administered under the terms of the insurance provider and the insurance policy. The HSA is the investment account administered by the financial institution that is the HSA Custodian/Trustee. Their only connection is their relationship to HSA contribution limits. Withdrawals from an HSA that are not used for qualified medical expenses are not taxfree and will also be assessed an additional tax (usually known as the IRS penalty ) of 20 percent. Prior to 2011 the penalty was 10%! The tax will apply but the penalty will no longer apply, if the withdrawal was not used for qualified medical expenses, as long as the withdrawal was made due to: Death and paid to an HSA Beneficiary, Disability and paid to the HSA Owner, or Attainment of age 65 by the HSA Owner Example 1 Amanda inherits her deceased father s HSA in 2015. Amanda is 22 years old. Amanda will owe income tax on the amount of the inherited HSA but she will not owe the additional tax of 20 percent since she received the money due to the death of the HSA Owner, her father. Example 2 Kurt has an HSA with a $60,000 balance. Kurt is 67 years old in 2015. Kurt decides to use part of his HSA for ordinary living expenses in his retirement, not for qualified medical expenses. Because Kurt is not using these distributions for qualified medical expenses he will owe taxes on the withdrawals. However, since Kurt is 65 or older he will not owe the additional 20 percent tax. 15

NOTE: HSA Owners who have attained age 65 have another advantage with HSAs. Even if they are enrolled in Medicare and can no longer make HSA contributions, the funds accumulated in an HSA are always available on a tax free basis for qualified medical expenses. HSA funds are not a use-them-or-lose-them account. They remain available year-to-year. In addition, the funds can be used for any purpose after age 65 and not be penalized. Funds used for non-qualified expenses will be subject to tax but will NOT be penalized. Many compare this situation to an IRA. They got the deduction for the HSA contributions when contributed. The earnings accumulated tax-deferred while in the HSA, and the funds can be used for anything. AND, there are no required minimum distributions after age 70½, or any other age, as there are for IRAs. Example 3 George turned 65 in 2015 and enrolled in Medicare. He no longer was eligible to make HSA contributions. His HSA account had a balance of $12,500. Newly retired, he decided to take his wife, Martha on a long ago promised Hawaiian vacation. The cost was going be $6,000. He used funds from the HSA to purchase the vacation package. It was subject to tax but was not penalized even though it was not used for qualified medical expenses. NOTE: The ability to pay any qualified medical expense after the HSA Owner is no longer eligible to contribute to the HSA applies to all HSA Owners, regardless of age. Example 4 Bill, age 57, was no longer eligible in 2015 to make HSA contributions since his employer changed health care plans to a non-hdhp policy. His HSA has a balance $15,000. Even though he can no longer make contributions, the funds in the HSA can be used for any qualified medical expense incurred from the day of the HSA establishment until the HSA funds have been exhausted. In 2015, Bill decides to use his HSA funds for medical expenses for his wife Hillary. No problem. That distribution is a tax free, penalty-free distribution. More HDHP Details Expenses that are counted towards meeting the out-of-pocket limit: Deductibles Co-payments ( co-insurance payments) Expenses that are not counted towards meeting the out-of-pocket limit: HDHP Premiums Services that are not covered by the HDHP Penalties assessed by the HDHP or additional co-payment expenses for 16

failing to pre-certify for a specific provider or for certain medical procedures Amounts paid by a covered individual in excess of the usual, customary, and reasonable ( UCR ) amount Amounts paid by a covered individual in excess of a lifetime limit, or other reasonable restrictions on other benefits HDHP QUESTIONS and ANSWERS Q-1 My health care plan provides for 2015 family coverage and has an embedded deductible of $2,000 per covered individual. The Plan also has an umbrella deductible of $6,000. The out-of-pocket limit for the plan is $11,000. Is this an HSA- Eligible plan? A-1 No, your plan is NOT an HSA-eligible HDHP because benefits could be paid out BEFORE the minimum 2015 deductible of $2,600 is covered, even though the out-ofpocket limit is complying. Q-2 I have a health care plan that provides for 2015 family coverage and has an embedded deductible of $2,600 per covered individual. The plan also has an umbrella deductible of $8,000. The out-of-pocket limit for the plan is $11,000. Is this plan HSA-eligible? A-2 Yes, This plan is an HSA-eligible HDHP because both the 2015 minimum deductible of $2,600 and maximum out-of-pocket expenses of $12,900 are complied with. Q-3 A health care plan provides for 2015 self-only coverage and has a deductible of $1,300. The out-of-pocket limit for the plan is $7,000. Is this plan HSA-eligible? A-3 No, the plan is NOT an HSA-eligible HDHP because although the minimum annual deductible is complying, the maximum out-of-pocket expenses do not comply with the 2015 limits of $6,450. Q-4 Will an HDHP continue to be an HDHP if covered individuals received discounted prices because of negotiations between the HDHP and health care providers? A-4 Yes. The fact that an HDHP has negotiated lower prices from health care providers will not cause the health plan to fail to be an HDHP. 17

Q-5 What if the HDHP coverage begins on a date other than the first day of the month? A-5 As a general rule the individual must wait until the first day of the following month to make an HSA contribution. Q-6 Are there any exceptions to the rule that states that in order to be an eligible individual, an individual may not be covered by any other health plan that is not an HDHP? A-6 Yes, per the IRS list, exceptions exist for plans providing limited coverage, such as insurance for: Workers compensation laws, Tort liabilities, Liabilities relating to ownership or use of property (automobile, home insurance), Insurance for a specified disease or illness, Insurance that pays a fixed amount per day (or other period) of hospitalization, A prescription drug plan that pays benefits before the HDHP deductible has been met, Insurance for accidents, Insurance for disability, Dental insurance, Vision insurance, Long-term Care insurance, VA coverage benefits provided more than three months earlier, and Employee Assistance Programs ( EAPs ), disease management programs, or wellness programs provided that these programs are not considered health plans because they do not provide significant benefits in the nature of medical care or treatment. Q-7 Can a health plan pay for preventive care with no (or a small amount of) deductible and still be considered a HDHP? A-7 Yes. Per the IRS list, acceptable preventive care includes, but is not limited to the following: periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals, routine prenatal and well-child care, child and adult immunizations, tobacco cessation programs, obesity weight-loss programs, certain drugs and medications, and screening services. 18

In addition, the Affordable Care Act makes additional exceptions for certain policies. The HSA Owner must check with their insurance provider to make sure their HDHP is HSA-Qualified. Q-8 What screening services are allowed? A-8 The following screenings are outlined by the IRS. Cancer Screening Breast Cancer (Mammogram) Cervical Cancer (Pap Smear) Colorectal Cancer Prostate Cancer (PSA Test) Skin Cancer Oral Cancer Ovarian Cancer Testicular Cancer Thyroid Cancer Heart and Vascular Diseases Screening Abdominal Aortic Aneurysm Carotid Artery Stenosis Coronary Heart Disease Hemoglobinopathies Hypertension Lipid Disorders Infectious Diseases Screening Bacteriuria Chlamydial Infection Gonorrhea Hepatitis B Virus Infection Hepatitis C Human Immunodeficiency Virus (HIV) Infection Syphilis Tuberculosis Infection Mental Health Conditions and Substance Abuse Screening Dementia Depression Drug Abuse Problem Drinking Suicide Risk Family Violence 19

Metabolic, Nutritional, and Endocrine Conditions Screening Anemia, Iron Deficiency Dental and Periodontal Disease Diabetes Mellitus Obesity in Adults Thyroid Disease Musculoskeletal Disorders Screening Osteoporosis Obstetric and Gynecologic Conditions Screening Bacterial Vaginosis in Pregnancy Gestational Diabetes Mellitus Home Uterine Activity Monitoring Neural Tube Defects Preeclampsia Rh Incompatibility Rubella Ultrasonography in Pregnancy Pediatric Conditions Screening Child Developmental Delay Congenital Hypothyroidism Lead Levels in Childhood and Pregnancy Phenylketonuria Scoliosis, Adolescent Idiopathic Vision and Hearing Disorders Screening Glaucoma Hearing impairment in Older Adults Newborn Hearing Q-9 Can preventive care service or screening ever include treatment? A-9 Yes. Preventive care service or screening can include treatment of a related condition during the preventive care service or screening procedure (before the HDHP deductible has been met) where it would be unreasonable or impracticable to perform another procedure to treat the condition. An example would be the removal of a polyp during a diagnostic colonoscopy. CAUTION: Again, it should be mentioned that determining HSA eligibility and qualified medical expenses is NOT the responsibility of the HSA Custodian/Trustee. In fact, there still is a difference between definitions of Preventive Care with the medical definition not agreeing with the IRS definition, and there is now yet a third ever-changing definition with the new national health care law (ACA) taking affect. 20

Q-10 Are Medicare premiums a Qualified HSA Medical Expense? A-10 Although most other insurance premiums are NOT a Qualified HSA Medical Expense, Medicare Premiums are a Qualified HSA Medical Expense. This includes Parts A, B, C and D. Caution though, the HSA Owner is still NOT eligible to make HSA contributions once he is enrolled in Medicare. NOTE: Health Insurance Premiums for those over age 65 are generally qualified. Premiums for Medicare Supplement policies, however are NOT qualified medical expenses for HSA purposes. How to Establish a Health Savings Account If administered correctly, an HSA is a tax-exempt custodial or trust account much like an Individual Retirement Account (IRA) that is established for the intended purpose of paying qualified medical expenses of the HSA Owner, his or her spouse, as well as his or her dependents. The Internal Revenue Service has two model documents for HSAs. They are the 5305- C Health Savings Custodial Account and the 5305-B Health Savings Trust Account. These forms are comprised of 11 Articles that address the basic rules of HSAs. It should be noted that the language in these model documents is written using technical language, using references to the Internal Revenue Code (IRC), the source of the law on HSAs. The most current version of both of these documents is dated December 2011. Earlier versions should not be used to establish HSAs. In addition to the above mentioned documents that create the HSA, a financial organization that wants to act as the Custodian or Trustee of an HSA must also give the HSA Owner an explanation of the HSA rules in non-technical language. As with an IRA, this is often referred to as a disclosure statement. This disclosure statement can be written by the financial organization acting as the Custodian or Trustee or it can often be obtained from a forms vendors in the industry. It should be noted that while the HSA documents described strongly resemble the forms that are required for IRAs, the two sets of forms are not identical. One of the more notable differences between the documents required for HSAs and IRAs is that the documentation for IRAs, as part of the disclosure statement, must, when applicable, provide a growth-projection known as the financial disclosure and projection." HSAs do not have such a requirement. Disclosures concerning investments, TISA, FDIC/NCUA, CIP, etc. are, of course, still required. 21

The 7-Day Right of Revocation that is required for IRAs is not required for HSAs. However, many form vendors have added this provision to their documents. The HSA Custodian/Trustee could also use a longer or shorter revocation period. If one is used, it must be disclosed in the documentation. There may also be a state law to comply with. HSA Custodians/Trustees must be familiar with their HSA documents because they can differ from forms vendor to forms vendor. Most HSA Custodians/Trustees will have the HSA Owner complete an HSA application form. This HSA application will capture all of the relevant HSA Owner information such as name, address, Social Security Number, date-of-birth, etc., as required on IRS Form 5305-B or 5305-C. Many HSA applications can also obtain information about the initial HSA contribution, saving the need for a separate HSA deposit or contribution form. In addition, HSA applications can allow the HSA Owner to designate primary and contingent beneficiaries payable when the HSA Owner dies. Because the HSA agreement is a legal, binding contract, it must be signed and dated by both parties, the HSA Owner and the representative of the HSA Custodian/Trustee. Note that the HSA must be established prior to the HSA Owner incurring an HSAqualified medical expense. By IRS definition, an HSA is not considered established until a contribution is made into the HSA. It can be for as little as $1.00. Many financial institutions have a minimum balance requirement because of this rule, which is allowable. But it must be clearly disclosed. Simply completing the documentation, even if signed and properly dated, is not sufficient because an HSA is considered to be a legal trust, even if a custodial account, and a trust is generally not considered established until a contribution is made. To have an HSA three things must be occur: 1. Must be eligible under an HDHP 2. Completion of HSA Application 3. A qualified deposit/contribution must be made The HSA paperwork can certainly be completed ahead of time, which is especially helpful when signing a new client s employees. But remember, the date the HSA is established for qualified medical expense purposes is the date of the first contribution, NOT the date the application is signed. It does not make any difference who makes the first contribution, the HSA Owner or the HSA Owner s employer. That means the HSA Custodian/Trustee cannot report it as an HSA until a contribution has been made. That likely means it can NOT be put into the financial institution s reporting system until that first contribution is made. 22

IMPORTANT NOTE: Remember, an HSA is not considered by the IRS to be established until all HSA documents are properly completed (signed and dated) AND an HSA contribution is mad A Sample HSA Application Health Savings Account ( HSA ) Application Information About the HSA Holder Name Address Phone Number (home) E-mail Address (optional) Date of Birth Social Security Number Your Bank (cell) HSA Number Information About the Initial HSA Contribution Investment ( Account ) Number Amount $ Date of Contribution Tax Year For Which Contribution is Being Made (if applicable) Beneficiary Designation Regular and/or Catch - up Rollover from HSA or MSA Transfer from HSA or MSA From IRA From HRA/FSA Any surviving Primary Beneficiaries listed below will receive myhsa assets when I die. If none of the primary beneficiaries survive me, my HSA assets will go to the Contingent Beneficiaries listed below. If any beneficiary should die before me his or her share will be re -allocated to any surviving beneficiaries of the same category ona pro -rata basis. If no beneficiaries of either category survive me, my HSA assets will be paid to my estate. INo percentages are allocated, the beneficiaries will be deemed to have equal percentages. If the percentages allocated do no total 100 percent, any remaining amount will be allocated to all of the surviving beneficiaries of the same category on a pro - rata basis. Primary Name Contingent Spousal Consent - - Social Security Number or Taxpayer Identification Number - - - - Percentage % % % % % Relationship to HSA Holder As the spouse of an HSA owner living in a Community or Marital Property State I have been given a thorough disclosure of the HSA s assets. I hereby forgo any and all legal rights to all HSA assets and do also consent to the beneficiary designation above. Spouse s Signature Date Witnesses Signature (if required) Date Signatures This agreement shall be binding to both parties who have signed it. The financial organization shown above and whose representative s signature appear below have not given any legal or accounting advice to the HSA owner. The HSA owner has been instructed to seek his or her own legal and/or accounting aadvice. The HSA owner will hold the HSA Custodian harmless from any and all consequences of establishing this Health Savings Account and also from any transactions involving the Health Savings Account. The HSA Custodian can rely on all information provided by the HSA holder. The HSA Holder has received a copy of this HSA Application, the IRS Form 5305 - C, and a Disclosure Statement. Michael Nelson, President HSA Holder s Signature Date IRA Custodian s Signature Date Original Copy = HSA Custodian, Second Copy = HSA Holder, Third C opy, HSA Data Processing JM Training All Rights Reserved 5/07 23

HSAs as Individual Accounts It should be noted that HSAs are individually-owned accounts. There is no such thing as a joint HSA even though the HSA Owner may have Family Coverage under the HDHP and even though the HSA Owner may, according to the HSA Custodian s or Trustee s policies and according to a signed POA, allow an additional authorized signer or signers to withdraw funds from the HSA. HSAs must always be an individual account! While an HSA contribution based on a Family HDHP can be split between the spouses HSAs, the contributions cannot be adjusted if either or both spouses have self-only coverage. In that case, the one spouse s contribution must go into his/her HSA and the other spouse contribution must go into that spouse s HSA. Catch-up contributions can also not be adjusted. Each spouse s catch-up contribution must go into their own, personal HSA. Self-Only HDHP Policy and Self-only Non-HDHP Policy If one spouse has self-only HDHP coverage and the other spouse has a self-only non- HDHP policy, the HSA contribution is limited to the statutory limit for self-only coverage and must be contributed into the HSA of the spouse owning that HSA-eligible policy, as long as otherwise he or she is HSA-eligible. Self-Only HDHP Policy and Self-Only HDHP Policy If both spouses have self-only HDHP coverage, each spouse can have their own HSA and contribute each self-only contribution. They can NOT contribute into each other s HSA, putting more than the self-only limit in one of the HSAs. An HSA Custodian or Trustee is not required to verify that the customer is an HSAeligible individual but may choose to use a form designed for such a purpose. Family HDHP Policy and Family HDHP Policy With both spouses having Family HDHP coverage, the contribution limitation for both spouses follows the rules for just one family HDHP coverage amount. HSAs and Customer Identification Program (CIP) Like IRAs and most other accounts, HSAs are subject to the CIP rules. The HSA Custodian/Trustee must make sure they follow its own CIP procedures. There are no exceptions for HSAs. This sample form and chapter section does not address eligibility when rolling over or transferring an HSA from another Custodian/Trustee. In that situation none of the eligibility requirements need apply unless the HSA Owner wants to make additional contributions. 24

A Sample HSA Eligibility Form Information About the HSA Owner Health Savings Account Eligibility Name Address Phone Number (home) E-mail Address (optional) Date of Birth Social Security Number - - (cell) HSA Number Eligible Individual Requirements True False I certify that I have met all four of the following requirements: I am covered by a High Deductible Health Plan ( HDHP ) I am not covered by another plan that is not a High Deductible Health Plan (limited exceptions apply) I am not enrolled in Medicare I am not eligible to be claimed as a dependent on anyone else s tax return All four boxes must be checked True to be an eligible individual Signatures The financial organization whose representative s signature appears below has not given any legal or accounting advice to the HSA Owner. The HSA Owner has been instructed to seek his or her own legal and/or accounting advice. The HSA Owner will hold the HSA Custodian harmless from any and all consequences of establishing this Health Savings Account and also from any transactions involving the Health Savings Account. The HSA Custodian can rely on all information provided by the HSA Owner. Michael Nelson, President HSA Owner s Signature Date HSA Custodian s Signature Date Original Copy = HSA Custodian, Second Copy = HSA Owner, Third Copy, HSA Data Processing JM Training All Rights Reserved 5/07 25

A Sample HSA Beneficiary Designation* Form Health Savings Account Beneficiary Designation Your Bank Information About the HSA Holder Name Address Phone Number (home) E- mail Address (optional) Date of Birth Social Security Number Beneficiary Designation Beneficiary Designation (cell) HSA Number Any surviving Primary Beneficiaries listed below will receive myhsa assets when I die. If none of the primary beneficiaries survive me, my HSA assets will go to the Contingent Beneficiaries listed below. If any beneficiary should die before me his or her share will be re - allocated to any surviving beneficiaries of the same category ona pro rata basis. If no beneficiaries of either category survive me, my HSA assets will be paid to my estate. If no percentages are allocated, the beneficiaries will be deemed to have equal percentages. If the percentages allocated do not total 100 percent, any remaining amount will be allocated to all of the surviving beneficiaries of the same category on a pro - rata basis. Social Security Number or Primary or Relationship Name Taxpayer Identification Number Percentage Contingent to HSA Holder Spousal Consent - - Replacing Beneficiary(ies) I hereby revoke any and all prior beneficiary designations, if any, made by me and replace them with the primary (and contingent beneficiary ( ies ), if any), listed below. Adding Beneficiary(ies ) I am supplementing a prior beneficiary designation made by me on (date). I have adjusted the share percentages accordingly. - - % Primary Contingent - - % Primary Contingent - - % Primary Contingent - - % Primary Contingent - - % Primary Contingent As the spouse of an HSA owner living in a Community or Marital Property State I have been given a thorough disclosure of the HSA s assets. I hereby forgo any and all legal rights to all HSA assets and do also consent to the beneficiary designation above. Spouse s Signature Date Witnesses Signature (if required) Date Signatures This agreement shall be binding to both parties who have signed it. The financial organization shown above and whose representative s signature appear below have not given any legal or accounting advice to the HSA owner. The HSA owner has been instructed to seek his or her own legal and/or accounting advice. The HSA owner will hold the HSA Custodian harmless from any and all consequences of establishing this Health Savings Account and also from any transactions involving the Health Savings Account. The HSA Custodian can rely on all information provided by the HSA holder. The HSA Holder has received a copy of this HSA Application, the IRS Form 5305 - C, and a Disclosure Statement. Michael Nelson, President HSA Holder s Signature Date IRA Custodian s Signature Date Original Copy = HSA Custodian, Second Copy = HSA Holder, Third C opy, HSA Data Processing JM Training All Rights Reserved 5/07 *NOTE: An HSA Custodian or Trustee may also use a form similar to this that allows the HSA Owner to replace or add designated beneficiaries. 26

HSAs and Community/Marital Property States Although it is true that a spouse does not need permission to name someone other than his or her spouse as primary beneficiary of his or her HSA, in a non-community/marital property state, this does not mean that a spouse who is not named as a beneficiary of an HSA may not be able to lay claim to a portion of those HSA assets under state laws, which often specify a minimum percentage of a deceased spouse s estate to which a surviving spouse is entitled. Therefore, if a surviving spouse has been shorted by his or her deceased spouse, he or she may file a court ordered request with the financial organization to freeze the account until the court has determined how to divide the assets therein. NOTE: Spousal consent requirements, technically, only apply to community and marital property states. However, it is not always clear which state has jurisdiction over an HSA, since a person may establish an HSA in a non-community/marital property state, but now is a resident of a community or marital property state. If a person may be subject to community or marital property laws, and they want to name a person or entity other than their spouse, they should have their spouse sign a spousal waiver. Regardless of whether a person lives in a community/marital property state or not, spousal consent is never required if a spouse is the sole, primary beneficiary of an HSA; however, it may provide future coverage in the event that the HSA Owner and spouse become subject to the jurisdiction of a community/marital property state in the future due to a move. IMPORTANT NOTE: It is advisable that an HSA Custodian/Trustee consult their HSA Consultants and their own legal counsel before distributing Inherited HSAs. Likewise, this is a good idea for the HSA Owner before naming beneficiaries. ***************************************************************** Same-Sex Marriages: US Treasury and IRS Issue Important Ruling and Clarification on Federal Definitions of Marriage and Spouse ****************************************************************** On August 29, 2013 the US Treasury and the IRS issued Revenue Ruling 2013-17 (Rev. Rul. 2013-17) clarifying the terms of the 2013 Supreme Court decision concerning samesex marriages. In what is described by many experts in the industry as a broader definition than was expected, the clarifications include: 27

Legal marriages between same-sex partners performed in any state of the US, Washington DC, any US Territory or any Foreign Country will be recognized for all Federal tax purposes and other Federal administrative purposes where marriage is a factor. These marriages will be recognized by the Federal Government regardless of the state of residency. (It was first thought that these same-sex marriages would only be recognized by the Federal Government if the individuals resided in a state allowing such marriages, known as the state-of-domicile rule.) The US Treasury and the IRS explained that they thought such a ruling (residency requirement) would be too difficult for the employers to administer with multiple state offices, employees living in different states, employees moving from state to state, etc. Where spousal rules apply, that means contribution rules for IRAs and HSAs are affected. It also means that some IRA and QRP Required Minimum Distribution (RMD) calculation rules are also affected. Rules for 401(k)s are also affected. Any area of IRAs, HSAs, CESAs and QRPs that uses marriage/spouse as a determining factor in administration must now follow this new definition of marriage. Although the official effective date was September 16, 2013, there were even provisions in this ruling that allows those affected by the previous rulings/definition to amend their previous tax returns. Those wanting to do so should seek their tax and legal counsel because there are special rules and limitations that must be followed. In addition, the IRS continues to make other adjustments available through amending tax returns. This Revenue Ruling, however, does NOT apply to registered domestic partnerships, civil unions or similar formal, legal relationships between same-sex partners, under any state law. However, it appears those couples could go to a state that does allow samesex marriages and then be eligible for any Federal marriage/spousal rules in their state of residency. They would NOT be eligible for the amending of previous tax returns however. It should be noted that this just applies to the Federal definition of marriage and spouse. How individual states rule will be determined by state law and the Courts. After this Revenue Ruling, there were still a number of unanswered questions. US Attorney General, Eric Holder, further clarified the government s position. On February 8, 2014, Mr. Holder said that under this policy, same-sex couples will enjoy these privileges even in states that do not recognize such marriages. All Federal departments must now abide by this ruling in all matters. (There was some confusion about this before this announcement.) So, this means that any tax, IRA, HSA CESA or QRP related matter will abide by these marriages as long as the marriage was 28